THE KEY TO THE UPSWING IN IWM -- RAFF REGRESSION CHANNEL DEMO -- BREADTH THRUST IS BULLISH UNTIL IT ISN'T -- ELEMENTS OF RISK AVERSION REMAIN -- MEDICAL DEVICES ETF CHALLENGES PRIOR HIGHS -- OIL AND GASOLINE CONSOLIDATE WITHIN DOWNTRENDS
THE KEY TO THE UPSWING IN IWM (RAFF REGRESSION CHANNEL DEMO)... Link for today's video. Chart 1 shows the Russell 2000 iShares (IWM) with Raff Regression Channels marking the swings over the last six months. The overall trend is down because the ETF formed a lower high in early September and broke triangle support in late September. The current swing is up after the recent surge. The Raff Regression Channel consists of three lines. The middle line is a linear regression and the outer lines are set equidistant from the furthest high or low. I start my channels from the closing high or low and extend this to the highest or lowest close of the move. IWM broke out with Monday's surge above 109 and this breakout is holding. I drew a rising Raff Regression Channel from the closing low (13-Oct) to the closing high of the current move, which was yesterday. I will extend the channel if there is a new closing high from here. The lower trend line ends at 108 to define the upswing. A close below this level would reverse the upswing and call for a new downswing. The indicator window shows the IWM:IWB ratio surging in mid October, but falling short of a breakout that would signal relative strength in small-caps. Chart 2 shows the Russell MicroCap iShares (IWC) with similar characteristics. Today's video includes a live demo on using the Raff Regression Channel.
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Chart 1
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Chart 2
BREADTH THRUST IS BULLISH UNTIL IT ISN'T... With an eight day surge, the major index ETFs have recouped most of the early October decline and moved back above broken support levels. I was impressed with this surge because we also saw a breadth thrust. Chart 3 shows the 10-day moving average of AD Percent for the S&P 1500. AD Percent equals advances less declines divided by total issues. An upside breadth thrust occurs when the 10-day SMA moves from below -15 to above +15% in just a few weeks. There have been eight bullish thrusts signals over the last two years and the last three occurred on February 12th, August 18th and October 21st. We must now ask ourselves what it would take to negate this breadth thrust. Put another way: how much selling pressure is required to turn bearish for the short or medium-term? I think that a move below -15% would signal enough selling pressure to indicate that a correction is at hand. It could be a small correction, like in late July and early August, or a deeper correction, like in late September and early October.
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Chart 3
ELEMENTS OF RISK AVERSION REMAIN ... Even though stocks surged over the last two weeks, signs of risk-aversion remain in the financial markets. Chart 4 shows the 2-year Treasury Yield ($UST2Y) breaking down in early October and then moving back above .40%. The yield remains below the August low and below the 2014 channel. I would like to see a surge back above the lower trend line to put the uptrend back in play. This would suggest that money is moving out of short-term Treasury bonds (safety) and this would be positive for stocks.
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Chart 4
Chart 5 shows the S&P Consumer Discretionary Sector ($SPCC) relative to the S&P Consumer Staples Sector ($SPST) using the price relative ($SPCC:$SPST ratio). The consumer discretionary sector has been underperforming the consumer staples sector all year. Notice how this ratio moved peaked in late August and moved lower throughout September. Relative weakness in the consumer discretionary foreshadowed the Sep-Oct correction. The ratio got a bounce over the last two weeks, but remains below the 50-day EMA (red line).
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Chart 5
Chart 6 shows the S&P 500 Equal-Weight Index ($SPXEW) relative to the S&P 500 using a 5-day EMA. I made the actual line plot invisible because it is quite noisy. The equal-weight version outperformed from late December until late February and then performed in line until mid July. The equal-weight S&P 500 has seriously underperformed the last four months, especially in September. The surge over the last eight day is a start, but I would like to see at least a trend line break to show some serious relative strength in the rank-and-file stocks of the S&P 500.
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Chart 6
The three defensive sectors are the closest to new highs. Chart 7 shows the S&P Utilities Sector ($SPU) hitting a new high today. The S&P Consumer Staples Sector ($SPST) hit a new high earlier this month and is close to this high now. The S&P HealthCare Sector ($SPHC) recovered from its dip and is challenging its September high. The three defensive sectors are trading at or near 52-week highs, while the other sectors and the S&P 500 remain well below these highs. This shows a preference for defense right now.
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Chart 7
MEDICAL DEVICES ETF CHALLENGES PRIOR HIGHS... Chart 8 shows the Medical Devices ETF (IHI) going through some serious volatility over the last five weeks. At times like this, it may help to use moving averages to filter the noise. There are no hard and fast rules for length so you may need to experiment a little. This chart shows a 20-day SMA in blue and a 100-day SMA in red. The 20-day SMA flattened from late July until now, but the 100-day SMA continued to rise. A rising moving average means the average price is rising, which means it is in an uptrend. The indicator window shows the price relative (IHI:SPY ratio) breaking out in early October and hitting a new high in mid October. Chartists can also use weekly chart to filter the noise. Chart 9 shows IHI with the top ten holdings listed.
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Chart 8
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Chart 9
OIL AND GASOLINE CONSOLIDATE WITHIN DOWNTRENDS... The next three charts show the December futures contracts for Light Crude (^CLZ14), Brent Crude (^BZ14) and Gasoline (^RBZ14). I am using the futures contract because I think these represent the "purest" price action. In contrast, the corresponding ETFs are made up of various futures contracts and include certain costs (trading costs, management fees, slippage etc..). I am watching these three closely because they are consolidating after sharp declines. An oversold bounce could boost energy shares, while a continuation lower would likely weigh. The red shadings over the last two weeks mark the first resistance areas to watch on all three.
Chart 10 shows December Light Crude trying to firm within a downtrend. Notice that crude did not bounce along with the stock market and remains quite subdued. There are two unconfirmed patterns at work. First, an outside reversal formed on 16-Oct. Oil also bounced on Thursday to establish support at 80. A follow through breakout at 84 would be short-term bullish and target a move to the low 90s. The Aug-Sep consolidation and 50-62% retracement zone mark resistance here. The second pattern at work is a pennant, which is a continuation pattern. With the prior move down, this continuation pattern is bearish and a break below 80 would signal a continuation lower. The indicator window shows the USO Oil Fund (USO) for reference.
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Chart 10
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Chart 11
